and the trade-offs that sit beneath these footprints. Forward-look- ing metrics allow us to stress test different situations that could occur using a range of metrics or scenarios. Essentially, we cannot rely on a backward-looking footprint in its entirety. Although scores may take into account a company’s future resilience or momentum towards addressing risks. We are also mindful that forecasts are imagined to see how something may play out, and have a limited amount of certainty. The best way to add value is by using these metrics in combination to act as an initial screening process and to begin to understand the complexity of risk. Neither footprints, scores or forecasts should be used in isolation but rather to begin to add colour to the bigger picture.
PI: Climate change is one of the biggest issues in ESG, but is divesting the answer to decarbonising the economy? Llewellyn-Waters: It is not just about mitigating exposure by not holding carbon intensive industries, such as oil and miners. It is about adapting to how capital is allocated and priced. There is sig- nificant carbon capital at risk and it is more complex than just not investing in those industries. We have the Task Force on Climate-related Financial Disclosures now which provides the foundations to internalise carbon costs. In effect, carbon costs shift from being a by-product of business to a direct cost, putting companies with a reduced footprint in a better competitive position. So, it is not about getting rid of carbon intensive industries, it is understanding the broader footprint of companies. This is where we come back to the intersection of fiduciary duty and the planet. Gamon: It needs collective action. It is no good one investor divest- ing and expecting that to change the world. We all have to move the dial on these companies, not just oil and gas, but high carbon emitters such as the steel industry and utilities. Policymakers are key and COP26 is going to be a driver for that collective action. This is the start point because investors can influence companies in a big way through voting and engagement. There are exceptions where divestment is necessary. Some trus- tees have charity sponsors with strong views on certain practices or there is a reputational issue which could threaten their financial standing as an organisation. This applies to a minority of capital across the world, so it is not going to prevent collective action.
PI: Michael, would you divest if engagement is not working? Marshall: It is something we do use where we see elevated risks, but if we only use divestment to decarbonise our portfolios we will not achieve the Paris goals.
There are two strategies one might bring into play in response to the threats of climate change. One, build a portfolio that is resil- ient to the threats of climate change or using some of the trends in the transition to a low carbon economy to outperform.
10 March 2021 portfolio institutional roundtable: Responsible investing
Two, prevention. A long-term asset owner is just as interested in prevention when it comes to climate change as resilience. We might exclude companies when trying to build a resilient portfo- lio, such as those deriving more than 30% of their business from thermal coal or tar sands for risk reasons, but with other carbon intensive industries we need to think about prevention. So, engagement and decarbonising companies is what we focus on. Jackson: Our engagement strategy is focussed on long-term out- comes driven by best practice stewardship. Whilst divestment can be an important last resort, outcomes-driven active ownership is a long process that could take several dialogues to get to the root of the issue and escalation tactics to drive change. Firth: We prefer engagement over divestment. Divestment does not change anything because carbon emissions will still be present if we divest from all the oil and gas stocks we hold. It would not help the shift to the low carbon world we are all aiming for. If a stock is sold to an investor who is not an active steward, then the pressure on the company has reduced. That is a get out of jail free card for the laggards. We need long term, forward-looking metrics and not just to look at carbon emissions. We need all sectors to make that transition. When we look at the carbon footprints of our portfolios, some of the biggest emitters are the companies we need to enable that transition, so we engage with them to change their ways of operat- ing and reduce emissions.
Divestment is a blunt tool and needs to be used in conjunction with engagement. The focus is moving away from just the extrac- tive sectors, with investors now also looking at sectors such as banking and insurance, it is important to look at the wider land- scape and where emissions are coming from.
PI: Edward, innovation is also needed to decarbonise the economy, so what technical advances are exciting you? Lees: There are several things. There is an increasing overlap between the areas that need to decarbonise and technology because we need it to happen yesterday. The clock is ticking but technology is great at finding fast solutions.
Cheaper green hydrogen and how we make electrolysers more efficient will revolutionise so much because there are aspects of decarbonising that you can address through an electron, while oth- ers need to be addressed through molecules. That requires a wholesale overhaul of our infrastructure. It is a big job. It is why these targets for 2050 are so big and tens of trillions of dollars of expenditure is needed. It is one thing to state these targets and another to implement them.
There are revolutionary concepts like battery technology, new materials for the cathode, for the anode. There is a lot of exciting stuff going on. We have little flashes in the news that will bring this to people’s attention like QuantumScape, the Bill Gates- backed electric car battery.
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